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The Sum of All Fears for Investors

Stock-Markets / Stock Markets 2010 Nov 21, 2010 - 08:18 AM GMT

By: Wink_Twyman


The Sum of All Fears (2002) is a dramatic movie about a nuclear detonation outside of Baltimore, Maryland during the Super Bowl. The plot is riveting. I can still see the face of Morgan Freeman (CIA Director William Cabot) as he recognizes the unthinkable, that a stolen nuclear device is about to remove Baltimore from the face of the planet. Freeman scrambles to leave the Super Bowl with the President and Secret Service but it is too late. It is...too late.

As investors, we have fears. We have all had our Morgan Freeman moment when the unthinkable is upon us. Back in August 2008, I would check and re-check a five-year chart of the NASDAQ Composite. I did not want to believe my eyes. I did not want to connect the dots, that a multi-year Rising Wedge pattern was about to break down. I doubted myself because no one in the media was screaming "Fire! Fire!" Fortunately, I acted on my fear when investors were blindly bullish and expecting higher prices ahead.

What is our sum of all fears as investors?

We fear that we will get it wrong. We fear that the financial planners and advisers have sold us a bill of goods, that we have been duped into believing that the future years will mirror the go go years of the 1990s and 1980s. Late at night, we think about the 7% annual rate of return assumptions used by the Thrift Savings Plan or the 401(k) plan of your choice and we worry about another 9-11 or 2008. We worry that "The Ben Bernank" is tilting against windmills and that our plumber might have a better track record on calling the market (ok, that's a cheap shot but its cheaper than Quantitative Easing).

We worry that this decade will be one, long slog with subpar market performance in our retirement accounts. When we visit the bookstore, we thumb through Harry Dent's latest book on the Great Depression Ahead and think, "Could it be true? Could Dent be right this time?" We run through the market pattern since October 11, 2007. We dare to think that the Bear Sterns low in March 2008 might be a generational level of resistance. (Bob Prechter isn't always wrong, you know.) The thought of 1256 as stone-cold resistance on the S&P 500 Index is unpleasant, so we place that thought aside and hope that Jim Cramer and Larry Kudlow know better than our fears.

As investors, there are times when we should listen to these anxieties that bubble up from our fears. Our anxieties are there for a reason. They are telling us that we should be alert and on guard. They are activated by our long-forgotten memories. Maybe, you once went long because of a breakout above resistance. But you found yourself underwater a few days later because the action was a busted chart pattern. Your subconscious will remember even if you cannot recall the trade, George Soros is reputed to get an ache in his back when its time to reconsider his strategy. I suggest that the back pain is the subconscious telling the conscious Soros to beware.

I have a recurrent fear. Allow me to share it with you.

Back in 2004, I read an insightful essay by Daniel Arnold in PROFESSIONAL INVESTOR, page 10 (February 2004). Arnold's argument has stayed with me over the years. Arnold suggested that we faced a devastating depression between the years 2012 and 2025 because of demographics. The Baby Boomers would be retiring in greater and greater numbers over the decade. As they did so, their departure from the workplace would depress demand for corporate goods and services. Retiring Baby Boomers would also be more conservative with their investments. They would eschew growth investments in favor of fixed income assets. They would withdraw money from their retirement funds for living expenses. In turn, their withdrawals and redemptions would depress stock prices over the years.

Now, this scenario is the sum of all fears--that we live in a world facing a decade-long drop in stock prices and retirement accounts. No one will be safe. Returns will turn negative after 2012. And returns will stay negative for year after year after year. Only the most nimble money managers will be able to squeeze positive returns out of the stock market. Baby Boomers will retire into an uber depression. They will hope that the market will turn around. It will not. And then, one by one, we will have our Morgan Freeman moment when we recognize the unthinkable, a lost decade, is dead ahead.

As investors, our greatest challenge is to distinguish the fear to be bought (August 25, 2010) from the fear to be sold (August 2008). Therein lies the way to masterful investing.

Wink Twyman is a private investor and trader with fourteen years of market experience. He is a graduate of Harvard Law School and the University of Virginia with High Honors. Wink’s Las Vegas Thrift Savings Plan (TSP) Investment Club is up 12% for the year 2010, even though the S&P 500 Index is only up 7.5% for the year 2010 as of the market close November 12, 2010. Check out his blog:

Wink is not a registered financial adviser. This information is for educational purposes only. He cannot assume responsibility for your investment decisions and results. Please consult a professional financial adviser before making a financial decision. This essay is not a solicitation or offer to buy or sell any stocks, futures, options, or commodities.

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